2003 PLP (Trib (PTD)

Exchange gain Rs.80,771,132 Total Rs.128,223,012 Less interest income on F.C. Account Rs.41,625,376 Balance taxable income Rs.86,597,636 Total tax payable Rs.37,237,983 Date when tax payment under section 54 was due 31-12-1998. Date of assessment 28-8-1999 Days of default 271 days Additional tax payable Rs.5,092,225

9. Against the above treatment, the assessee filed appeals before the learned First Appellate Forum and the learned Appeal Commissioner vide impugned order, dated 5-11-1999 held that the Assessing Officer was not justified to tax interest income for the years under appeals and accordingly deleted the tax on that account charged under section

30. With regard to tax on exchange gain, the learned Appeal Commissioner held that the Assessing Officer was not justified in taxing the exchange gain. In respect of taxation of receipts on account of sale of scrapes for assessment year 1998-99, the learned Appeal Commissioner remitted the issue back to the Assessing Officer for de novo consideration. In respect of incorrect tax rate application for assessment years 1996-97 and 1997-98, the learned Appeal Commissioner directed the Assessing Officer to rectify the same. In respect of charge of additional tax for assessment year 1998-99, the learned Appeal Commissioner directed the Assessing Officer to recompute the additional tax after working out the, appeal effect. In respect of calculation error in the assessment order for the assessment year 1998-99, the learned Appeal Commissioner directed the Assessing Officer to remove the error. In respect of effect not given for tax withheld at source, he directed the Assessing Officer to rectify the same for all the years under consideration.

10. With regard to assessment order passed under section 52/86 by the Assessing Officer for the assessment year 1997-98, briefly the facts are as under:--

11. The Assessing Officer found that the assessee-Company failed to deduct tax under various subsection of section 50 of the Ordinance and he accordingly issued show-cause notice under section 52 read with section 86 of the Ordinance, as per details given in the order, mainly relating to the payments made in respect of (i) Mobilization fee (ii) Plant arid Machinery (iii) Consultancy and (iv) Office Rent requiring the assessee-Company to furnish details with dates of payments and other documentary proof and also the details of deduction of tax if made, any, as per relevant provisions of the law. Accordingly, the Assessing Officer called for complete documentary evidence alongwith explanation of the assessee-Company with the intimation that the assessee-Company in case of non-compliance or unsatisfactory explanation shall be treated as the assessee in default under section 52 in respect of above payments on which tax was not deducted and additional tax under section 86 shall also be charged separately. In response to the said show-cause notice, the assessee-Company submitted written reply, dated 31-12-1998 alongwith details. The Assessing Officer then finalised the assessment under section 52 read with section 86 of the Ordinance. In respect of Mobilization fee at Rs.11,42,94,821, the Assessing Officer accepted the contention of the assessee as being in accordance with clause (10) of Part II of Second schedule to the Ordinance and he did not draw adverse inference in that respect. In respect of consultancy amount, of Rs.3,15,44,229 stated to have been paid to Afridi and Angell law firm established UAE, the Assessing Officer did not accept the contention of the assessee with the observation that the nature of payments made to non-resident on account of consultancy by the assessee were such which fell within the definition of fee for technical services under section 12(5) on which deduction of withholding tax under section 50(3A) was applicable and not section 50(3) as quoted by the assessee and as such the assessee was liable to deduct tax at 15 % on the total payments and further that no remedy was available to the assessee in respect of fee for technical services as regards the provisions of Article VII of the Tax Treaty between Pakistan and the UAE. Accordingly the Assessing Officer treated the assessee in default for its failure to deduct tax under section 50(3A) and computed its liability at Rs.47,31,

634. In respect of amount of office rent at Rs.49,87,864, the Assessing Officer accepted the contention of the assessee and did not charge tax under section 52 of the Ordinance. Finally, the Assessing Officer worked out the total tax under section 52 at Rs.4,731,634 and determined additional tax under section 86 for default of 516 days from 30-6-1997 to 21-11-1998 at Rs.16,05,388 bringing the total tax liability of the assessee-Company at Rs.63,37,019.

12. The assessee preferred appeal by feeling aggrieved with the above treatment and. specifically disputed the liability as created by the Assessing Officer under section 52 for the payment made to non resident/UAE resident law firm by relying upon the Article VII of the Double Taxation Treaty between Pakistan and UAE as to be covering such professional services and further agitated against the additional tax charged under section 86 of the Ordinance. The learned Appeal Commissioner vide impugned order dated 5-11-1999 set aside the issue with the directions that the issue may be re-examined in the light of the various provisions of Tax Treaty between Pakistan and UAE and that the Assessing Officer should keep the provisions of section 163 as well as the case-law quoted by the AR in mind while proceeding afresh and that the Assessing Officer should also apply correct rate of tax as indicated on page 5 of the order. In respect of point of jurisdiction of the Assessing Officer, as disputed by the learned AR of the assessee, the learned Appeal Commissioner came to the conclusion that the arguments of the AR relating to the jurisdiction of the Assessing Officer did not merit consideration for the reasons as recorded by him in the impugned order and then while adjudicating the issue of tax rate on technical fees in the Double Taxation Treaty between Pakistan and UAE directed the Assessing Officer that the contention of the A.R. that tax charged should not exceed 12 % as stated in Article 13 of the Treaty be kept in mind.

13. Now, the department have come to us against the said action of the learned Appeal Commissioner as per grounds enumerated above.

14. We will take up each issue separately as raised through grounds of appeals assessment year wise.

15. The first two grounds of appeals in all the said years are common. The department have disputed the action of the learned First Appellate Forum regarding deletion of the tax on interest income. It was specifically alleged that the learned CIT(A) placed reliance upon unreported case of the Tribunal (ITA No. 136/KB of 1998-99 and ignored a reported case-law (1999) 79 Tax 1 (Trib.).

16. The learned DR during the course of his arguments contended that the case reported as (1999) 79 Tax 1 (Trib.) has been decided by the three Member Bench of the Tribunal and as such the ratio of said case law will have precedence over all other decided cases of alike nature on account of principles of certainty and doctrine of Judicial precedence. He then stated that there was a similar situation in that case where an industrial undertaking was in the process of setting up and income wherefrom was exempt from tax under the Ordinance. He further stated that proceeds on account of sale of scraps etc. produced during construction were set off against capital expenses and the interest carried was set off against interest paid/accrued but the Assessing Officer treated both the receipts as chargeable to tax as income from other sources under section 30 of the Ordinance and accordingly the Tribunal upheld the said action of the Assessing Officer. He then referred to the relevant observations and findings of the Tribunal given at para. 36 to 39 in the said reported case which are reproduced below- for the sake of convenience for reference purposes:-- "

36. Thus, in our considered opinion, income earned by way of interest without engaging in an activity falling under the meaning of business or say where money is not utilized as stock in trade is income from other sources under section 30 of the I.T. Ordinance. Neither, the assesses personal status nor the nature of business, profession or occupation, one is engaged in, would change the nature of such income. Similarly, neither the source of the funds generating such interest income nor the purpose for which such fund are obtained by the depositor would have any bearing on the nature of such income.

37. In short, neither the fact that the assessee is a company incorporated to set up an industrial undertaking, the profits and gains being derived or to be derived wherefrom, are exempt under the I.T. Ordinance or otherwise, nor the fact that such company or an assessee having any other personal status under subsection (32) of section 2 has deposited the funds out of equity or out of borrowed capital, nor the fact in the income year during which such funds are deposited, the assessee is engaged or is not engaged in any business or profession would change the classification of such income under section 15 of the Ordinance.

38. Regarding the alternate plea for allowing interest paid on the borrowed capital, the deposit in bank whereof has yielded the interest income under section 30 supra we find that in the case of both B .F ..Ltd. as well as R .Ltd. Such amounts are borrowed for the purposes of the business and not wholly and exclusively for the purpose of earning income from other sources i.e. interest in the instant cases. The expenditure incurred on account of interest on such borrowed capital, therefore, is admissible as expenditure revenue of capital as the circumstances warrant under section 23(1)(vii) and not as expenditure laid out or expended wholly and exclusively for the purposes of earning interest income as admissible under section 31(1)(b) of the Ordinance. Accordingly, we confirm the view that the expenditure incurred on account of interest on borrowed capital is not be deducted under section 30(1)(b) from interest earned on deposit of such funds in Bank Assessable as income from other sources under section 30 of the Ordinance.

39. We accordingly, overrule the decision, on this issue of the Division Bench reported as 1988 PTD (Trib.) 369 and approve the view taken by two Division Benches of this Tribunal in the judgments reported as 1996 PTD. 11 and 1988 PTD (Trib.) 3319. We confirm the finding of the learned CIT(A) in the case of B ..F Ltd. and dismiss-the appeal at the instance of the assessee; vacated the decision of the learned CIT(A) in Rupafil Ltd. As well as the decision in D .... T.... M,.... Ltd. and allow the appeals at the instance of the Department by restoring the assessment orders."

17. The learned D. R. then referred to a recent case of Honourable High Court Karachi reported as 2000 PTD 363 to further lend support to his contention, that interest income in such-like cases was liable to tax under section 30 of the Ordinance. He then drew our attention to the relevant part of the findings of the Honourable High Court as under:-- "Upon the above discussion, we have come to the conclusion that the impugned order, of the Appellate Tribunal 'is not only based on misreading and overlooking the evidence and material on the record but is also contrary, to the provision of the Ordinance inasmuch as in the absence of a finding that the respondent/assessee was doing the business of money-lending the interest income could not be treated as business income so as to be charged to tax under section 22 of the Ordinance. The interest income was to be charged to tax under section 30 of the Ordinance, which specifically includes interest income under the heading "income from other sources". In arriving at the conclusion the Appellate Tribunal had taken into consideration extraneous material and non-existent facts. That impugned order cannot be sustained in view of the defects pointed out by us during the course of the aforesaid discussion."

18. The learned D.R. then while referring to exemption on account of clause (176) of the Second Schedule of Part I to the Ordinance vehemently contended that the interest income earned by the assessee Company from bank deposits could never be termed as income from business or profession chargeable under section 22 of the Ordinance because such income was not derived from the power generation project of the assessee-Company. He further stated that the assessee was only entitled to exemption on the profits and gains which have been derived by it from power generation project set up in Pakistan. He then referred to various cases of the Islamabad Bench and Lahore Bench of the Tribunal decided vide ITA No.455/IB of 1997-98 dated 19-6-2000. I.T.A. No.7410/LB of 1996 dated 7-11-1998 and a decision of Honourable Lahore High Court dated 14-1-1999 in the case of Messrs Genera tech Pakistan Ltd. and further a case of the Honourable Peshawar High Court statedly reported as 1990 PTD 178 (H.C. Peshawar) specifically interpreting the words derived from attributable in the context of clause (176) of Second Schedule to the Ordinance. He further referred various cases from Indian Jurisdiction statedly reported as 135 ITR 390 (Kerala High Court); 122 ITR 139 (Madras High Court); 217 ITR 369 (Rajasthan High Court); (2000) 82 Tax 183 (H.C. India); 227 ITR 217 (SC India) and several others.

19. On the other hand, the learned AR of the assessee repelled the contentions of the learned DR and argued that all the income earned by the assessee-Company was exempt in terms of clause (176) of Part I of Second Schedule to the Ordinance. He then referred to relevant portion of clause (176) as under:-- "profits and gains derived by an assessee from a electric power generation project set up in Pakistan. on or after the 1st day of July, 1988." In the light of above, he argued that the interest income although was not an income from electric power generation, yet was not chargeable to tax because it was being derived from electric power generation project. He emphasised on the word "project" occurring in the said clause and contended that the word "project" broadened the scope of exemption to the entire profits and gains that arise reasonably, logically, and factually from the electric power generation project. He then contended that the assessee opened bank accounts to build the project and for making various payments and for various receipts through banking channel requiring the assessee to carry out operations through cross-cheques. He further contended that the primary object of banks accounts was for facilitating the primary business and for complying with the (sic) provisions and therefore, consequential earning of interest income could not be taken out of the ambit of section 22 as income from business for which exemption was allowed by clause (176) referred to above. He then also referred to clause (76-A) dealing with Hub Power Company and' contended that the said clause was of a clarificatory nature and as such was not restricted to only Hubco and interest income earned by the other power general projects was also exempt. He further contended that clause (76A) would become discriminatory in nature if interest income of other power generation projects is made chargeable to tax. He then while taking issue of other income with specific reference to pre-operative and post-operative business activities as raised through ground No.2 of the grounds of appeal, contended that company once registered becomes a person competent to carry on business and when its activities fall under the definition of term business then its related income and expenses become assessable under section 22, 23 and 24 of the Ordinance and the company can carry any of the business enumerated in the Memordandum of Association. He also took the plea, in the context of contention of the learned DR about the non-availability of exemption to the assessee, that if the exemption was not available at the set up stage then the assessment should have been framed giving the assessee allowance for revenue expenses like rent, salaries etc. incurred during set up stage under section 23 of the Ordinance. He then referred to the provisions of section 23 of the Ordinance for the allowance and deduction. He then also referred to definition of business as given in section 2(11) of the Ordinance to be including. any adventure in the nature .of trade etc. He then placed reliance on a case of Honourable Karachi High Court reported as 1969 PLD 278 and cases reported as AIR 1965 SC 513 and AIR 1970 SC 253 for the interpretation of the words "Trade" and "Business". He further referred 1977 PTD 20 (H.C. Lahore) and a decision of Full Bench of the Tribunal reported as 79 Tax 115 decided on 30-11-1998 and further drew our attention to Islamabad Bench decision in ITA No.1514/IB of 1996-97 dated 1-10-1998 wherein the Tribunal directed that the expenses be allowed to the assessee against interest income on proportionate basis. He then contended that case-law referred and relied upon in the grounds of appeal was previous decision while the one relied upon by the learned Appeal Commissioner was a subsequent decision and applicable to the facts of the case in hand.

20. We have considered the contentions of the parties referred to above and also the case-laws cited by them.

21. First of all, we may like to answer the proposition with regard to the effect of an unreported decision of the Tribunal with that of the reported case of the Tribunal decided by a Full Bench. The plea of the department was that the learned CIT(A) has ignored the reported case of a Full Bench and has relied upon an unreported case. The learned AR replied the plea by stating that the unreported case was subsequent in time than the reported case and the facts of unreported case were similar to the facts of the case in hand and as such was rightly relied upon by the learned CIT(A) while deciding, the issue in question in favour of the assessee. In this situation, to our mind, the law of precedent obviously would lean to give preference to the rule and principle laid down in the reported case decided by a Full Bench irrespective of the date of decision of the unreported case being subsequent in time. Moreover, the principle of effect of the decision of one Division Bench of the Tribunal upon another Division Bench of the Tribunal has already been settled in a case by a Full Bench of the Tribunal reported as (1997) 75 Tax 108 (Trib.) Of course, the law of precedent will favour for following the rule for giving preference to the reported case of a Full Bench of the Tribunal in applying the principle as settled therein to the proposition of the case in hand in the similar situation of given facts. Therefore, we have no doubt in our mind that the decision of the reported case (1999) 79 tax 1 (Trib.) of Full Bench of the Tribunal as referred by the department in the grounds of appeal is to be followed. The relevant parts of the judgment of the reported case have already been reproduced above. Accordingly, I the interest income of the assessee-Company will be chargeable to tax under section 30 anal income from other sources and to be subjected to allowances and deductions as permissible/admissible under section 31 of I the Ordinance. In this context, the decision of Islamabad Bench in the case of Messrs FFC Jordan Fertilizer Company decided on 1-10-1998 vide ITA No. 1514/1B of 1996-97 may also be considered by the Assessing Officer when he will re decide the issue after affording an opportunity to the assessee company of being heard and to produce any evidence to establish its claim if any with respect to allowance of expenses for earning interest income. In the light of above, we accordingly accept the contention of the assessee on that count but with the direction that the Assessing Officer will subject to tax the interest income as income from other sources under section 30 after providing an opportunity to the assessee in the manner indicated above and will also decide the question of admissibility/allowance of expenses to the assessee company, it incurred in earning the interest income in the context of section 31 of the Ordinance.

22. The above observations and findings also provide answer to the other grounds of appeals of the department with, regard to pre-operating and post-operating business activities of the assessee-Company with reference to other income and the exemption allowable on profits and gains on account of clause (176) of Part I of the Second Schedule to the Ordinance. When we have termed the interest income of the assessee as income from other sources under section 30 then such income may be in pre-operational period or post-operational period of the assessee Company would stand as income from other sources and. not income from business or profession under section 22 of the Ordinance and the exemption allowable under clause (176) to the assessee-Company will no, be available to the assessee-Company on such income. Obviously the profits and gains when accrued to the assessee from an electric power generation would be the income from business under section 22 of the Ordinance and would attract the exemption vide clause (176) of Part I the Second Schedule to the Ordinance. Moreover, the exemption to Hub power Company under clause (76A) for such interest income was inserted vide S.R.O. dated, 4-1-1995 and the said clause cannot be extended to, every power generation project or to be regarded as clarificatory in nature as argued by the learned AR. The other argument of the learned AR, that the said clause if is made applicable is only Hub Power Company would become a discriminatory legislation, was not tenable because a provision of law case create exceptions for certain specified persons/class of persons etc. in that law and such exceptions can never be regarded creating any discriminatory effect. Moreover, we will be transgressing our jurisdiction if we start declaring any provision of law as discriminatory and giving effect to the same in that manner.

23. In the light of above discussion, we, therefore, accept the plea taken in the second ground of appeals of the department for the assessment years 1996-97 to 1998-99 and decide the issue in favour or the department. Obviously, the other income cannot be regarded as income from business under section 22 to be made liable to exemption under clause (176) but would be charged to tax under section 30 alongwith allowances and deduction if any, admissible under section 31 of the Ordinance. Issue of credit of tax withheld at source for assessment years 1996-97 to 1998-99

24. Now the third ground which was common for all the years under consideration was about the direction of the learned CIT(A) for rectifying the case on the issue of credit of tax with held at source without verification as alleged to be unjustified. For the said ground, no convincing arguments have been put forth by the learned DR to rebut the contentions of the learned AR taken before the learned CIT (A) that all the requisite information was provided and the Assessing Officer also did not rebut the claim in the order. In these circumstances, we do not find any infirmity ip the direction given by the learned CIT(A) then the Assessing Officer is to rectify the same in view of the classification of the AR and decision of Tribunal cited in the impugned order.

25. Accordingly, the appeals of the department on that count will fail.

26. Now remains the other question of relief as allowed by the learned CIT(A) with regard to exchange gain for the assessment year 1998-99.

27. Again we have found that the learned DR could not controvert the findings of the learned Appeal Commissioner which were supported by various case-laws as cited in the impugned order. Obviously, the, exchange gain in the case of the assessee-Company would be an hypothetical accrual of income which was a gain on re-valuation of foreign currency and not a real income and otherwise was in the nature of a capital transaction. In addition to the case-laws cited in the impugned order may prefer to a decision of the Tribunal as relied upon by the learned AR also which was made order, dated 1-10-1998 in the case of FFC Jordan Fertilizer vide ITA No.1551/IB of 1996-97. The other relevant case-law have also been discussed in the said decision of the Tribunal finally culminating in cancellation of assessment orders and annulment of the assessment and terming the exchange gain on foreign currency deposits as a gain in the nature of a capital transactions and not liable to tax. Normally the exchange gain and exchange losses both are co-existent and one cannot be overlooked or separated from the other and hence cannot be termed as real income.

28. In view of above discussion, the plea of department in the grounds of appeals in respect of action of learned Appeal Commissioner regarding exchange gain is not sustainable and is, therefore, rejected. The departmental appeal on that count does not succeed.

29. With regard to the issue of taxation of receipts on account of sale of scrap, again nothing plausible has been argued by the learned DR to controvert the findings of the learned Appeal Commissioner or to point out any infirmity in the impugned order by which the learned Appeal Commissioner has remitted the matter back for de novo consideration. We agree with the reasoning advanced by the learned h Appeal Commissioner for arriving at the above conclusion of remanding the case. The matter is still open and the department can substantiate or establish, if any case-law is fully applicable to the proposition. The plea of the department as raised on that count is not entertainable and hence not accepted. Accordingly, the appeal of the department on that ground for the assessment year 1998-99 would fail.

30. As a result of above, the departmental appeals for the assessment years, 1996-97 to 1998-99 (respecting assessment orders under section 62 of the Ordinance) shall partly succeed to the extent and are disposed of in the manner indicated above.

31. Now we will take up the departmental appeal wherein the impugned order dated 5-11-1999 has been contested which was passed in appeal of the assessee against assessment order of the Assessing Officer made under section 52/86 of the Ordinance. The grounds of appeal have already enumerated above. The learned Appeal Commissioner while taking up the issue of withholding tax on legal fee of Rs.31,544,229 paid to Messrs Afridi and Angell of UAE discussed the matter at length by referring and reproducing the arguments of the learned AR advanced before him mentioning about various Articles of the. Treaty in that context and also various case-laws as well and then came to the conclusion that the assessment order was not maintainable and he then set aside the same with certain specific directions given by him in his order. Then dealing with the issue of tax rate on technical fee in the double tax treaty between Pakistan and UAE, he referred to clause (2) of Article 13 of the Treaty and finally came out with the direction to the Assessing Officer to examine the case afresh and the contention of the AR, that the tax charged should not exceed 12% as stated in Article 13 of the Treaty, be kept in mind. Obviously, to our mind, the provisions of double tax treaty between Pakistan and UAE will be given preference. The learned DR could not advance any arguments to establish as to what serious or great prejudice has been caused to the department by the above action of the learned Appeal Commissioner of his remitting the matter back for de novo consideration. We do not think that there was any infirmity in the impugned order liable for interference by this forum. The impugned order was comprehensive order touching all aspects and looked reasonable and proper in the circumstances of the case and hence not calling for any interference by us. Accordingly, the same is hereby affirmed.

32. Consequently, the departmental appeal relating to order under section 52/86 shall stand rejected.

33. All the above appeals shall stand disposed of accordingly as indicated above. C.M.A./805/Trib. Order accordingly.